Banking Integration and Capital Misallocation: Evidence from China.

This article examines the impact of integrating local banking systems across cities within Chinese provinces on capital misallocation among manufacturing firms. Using staggered mergers of Urban Commercial Banks (UCBs) from 2005 to 2014 as exogenous variation, the study finds that firms with initially high marginal revenue products of capital (MRPK) increase their physical capital by 19.3% and reduce MRPK by 33.1% relative to low MRPK firms after integration, indicating improved capital allocation efficiency. The effects are stronger for non-state-owned enterprises and firms geographically closer to integrated banks, with integration also enhancing firms' investment responsiveness to deposit shocks in neighboring cities. Overall, the findings suggest that local banking integration reduces geographical segmentation of credit markets, reallocates capital more efficiently across regions, and improves aggregate capital productivity in China's developing financial market.